Monday, January 21, 2008

Parliament Bypassed Again

So the government has this morning announced its plans for Northern Rock. Er, just a cotton pickin' minute. Shouldn't this have been announced to the House of Commons first?

UPDATE: A commenter has pointed out that it had to be announced to the Stock Exchange. I understand that, but if the announcement hadn't been pre-briefed the Stock Exchange could have been told at exactly the same time as the House of Commons.

And let's be clear. This is nationalisation by another name. It may not be civil servants who run the reconstituted bank, but the taxpayer is still guaranteeing it.

UPDATE 12.30: By preannouncing this at the weekend the Prime Minister, together with Branson's comments, effectively created a false market in Northern Rock shares. I'd have thought that this must have transgressed some FSA or Bank of England rule. Any of my City readers care to shed some light?

Probably should have been announced to the EU first - I can't see how they can allow it under fair trade rules, given it's just a huge long-term Government subsidy to a private company.

It's also, of course, quite quite mad (speaking as a Labour voter), to be turning the Government into effectively a bond insurer for one of the UK's riskiest lenders, just as bond insurers are facing financial collapse because of, er, involvement with risky lenders.

No, any price sensitive information about a traded share must be announced to the Stock Exchange first. Just like publically quoted football clubs in fact, who would be less of a gamble than Northern Rock... This guarantee will end in tears for the taxpayer, unfortunately probably after Gordon Brown has been turfed out of Downing Street.

Hmmm. Branson. I remember watching the '97 election coverage, and 'lo and behold WHO was interviewed at a Labour shindig? Branson. I remember he was being cagey about who he voted for, and was waffling something about 'business' and something or other. I find it strange that accompaning a certain G Brown to China is a certain bearded player in the Northern Crock saga. As Alice said- 'curioser and curioser.'

The Treasury here is stepping in to guarantee these bonds at exactly the moment the UK residential property market heads south. Just look at US mortgage bonds, even "prime" mortgages are trading at significant discounts now as the US housing market collapses.

Northern Rock had a failed business management and a narrow-minded management team. Why are we supporting it with billions of state guarantees?

There were legitimate reasons to get involved earlier, when the run on the bank threatened systemic financial collapse, bank runs need to be stopped. But now that risk has gone, there is absolutely no need to lend a penny to Northern Rock, nor to offer incentives to anyone to buy the bank.

As for the timing, a 7am announcement on RNS is the norm, but it would have been nice to have had a statement in the House today, but nothing is planned.

First, the Tories really must stop this fetish for demanding that every single announcement about anything be made in Parliament. This was never the case previously. Devaluation was announced on a Saturday evening in 1967 by a press release. War was declared on a Sunday morning in 1939 over the radio. Compare Hansard now to ten or twenty years ago and there must be five times as many statements now as then.

Second, it's unclear whether barnacle bill is referring to MPs or city traders. If the former, then they begin Monday morning in their constituencies and not in Parliament. This seems to be another example of the lunatic fallacy that unless an MP is actually sitting in the chamber of the House of Commons or a committee, they are 'on holiday' or not at work. The reason the House meets at 2:30 PM on Mondays is to allow the MPs to get there.

Thirdly, this is hardly 'nationalization by another name'. Everything is in place to nationalize Northern Rock if the government decides to do so, but this is a private sector rescue approach; the government is already involved in guaranteeing Northern Rock.

But there hangs the problem - it's no use just criticizing, what alternative approach should be followed? The Conservatives have sounded vaguely opposed to nationalization but not said outright that they would not do it. They supported the Chancellor's actions in September, opposed nationalization, and made the main criticism of government 'dithering'. The government now has a private sector rescue plan in place in a matter of months. Osborne has been made to look a fool with no ideas.

The Tories have themselves admitted it was a mistake to privatise the railways, so save your dogmatic obsession with privatisation. It has seen utilities with sensible prices replaced with rapacious merchants of greed with zip-all in the way of competition or higher quality.

The answer to this whole thing is far simpler than the government tells us: all depositors in NR should have their accounts transferred to National Savings, any remaining assets stay with the shareholders to do what they will with.

With regard to Parliament, Labour has always regarded Parliament as a necessary facade to keep up the pretence that we have a democratic system. Governments of all hues have spend the decades transferring decision-making from Parliament to Ministers.

I'm sorry but as a free-market conservative I think that Northern Rock should have been allowed to go bust or into administration if a purchaser cannot be found. As it is, taxpayers' money, which we all work hard to generate for this miserable government, is being used to prop up the financial ruins of a flawed and reckless business model, possible for many years into the future. Who will buy these junk bonds anyway? And what happens if the issue fais (as it should)? Once again, we will be picking up the bill. And all to save the sahreholders' skins, and the employees' jobs. Well, shares can go down as well as up(as the mantra goes - that's what 'risk' is all about); and no-one's job is totally secure, nor should it be secure by government guarantee.

The comic due of Brown and Darling has made a complete horlicks of the NR fiasco, mainly by bottling the tough decision they should have taken at the outset. The failure of a regional mortgage lender is hardly likely to bring down the whole of the rest of the banking system in this country, is it? The Opposition should insistwith all the power at its disposal that taxpayers' money is not squandered in this way, that the Liberals' bleating about nationalisation is a non-starter, and that NR should be allowed to breathe its last. It will be forgotten in 12 months. Otherwise, we will be still propping it up in ten years' time.

Enough time and resource has been spent on this petty topic. Enough is enough. Let the Ropck sink and we can all move on.

david boothroyd my dig was aimed politically.But if my superior calls a meeting at some unheard of hour, in some wilderness, I can't bleat I only start at 14:30hrs as an excuse - I'm there pronto!Thinking about it, it might expose our politicians to the realities of life if they did have to start at 09:00hrs in Parliament Monday morning.Then they could put up with our underfunded and inadequate transport infra-structure like the rest of us have too.

Under the current arrangement the Government receives the difference between the interest on the assets that the loan is secured on and the cost of Treasury funds or the gilt rate. This quite correctly compensates the Government (ie. the Taxpayer) for the risk that the collateral will be unable to meet interest and principal payments.

Under the proposed arrangement the Government provides a guarantee for the bonds which raise the capital in the commercial market. The Government (ie. the Taxpayer) has precisely the same risk - are we to be compensated for the guarantee?

It smacks of an attempt to get the whole mess "off-balance sheet" for the Government. Exactly the sort of financial sleight of hand that lead to the current liquidity crisis.

Need I also point out that the Government's advisers, Goldman Sachs, will pick up a handsome fee for saving the Government's arse. A bit like having your car run off the road by a crazed driver who then offers you their car repair services.

The government effectively controls NR by contract as a result of the Treasury funding for NR.

It also stands to lose £25 billion on the bonds and another few billiion on the deposits, which is far more than the equity holders in NR ever had at risk (i.e. the net shareholders equity, assets less liabilities).

The government even thinks it can dictate to the current shareholders that they should sell out to Branson or whomsoever the government chooses, which indicates that the government thinks they own the shares.

What could the Labour Party have done better? First of all they could have got the heads of RBS, Barclays, Lloyds, HBOS and HSBC in a room and told them that they were each going to take a 20% stake in NR and bail it out. When they blanched at that, the Chancellor would tell them that if they refused, all of their deferred tax liabilities from equipment and film leasing would be brought into tax in the next financial year, by virtue of the next Finance Act. That's the way these problems have always been solved.

Second, they can stop bleating about the exit from the ERM which cost less than Goldmans fees from this fiasco.

anonymous 12:19 is partly right. The Treasury whizz-kids are far too brilliant to fall for full nationalisation. Very cleverly, they are transferring only the upside to Richard Branson, and so only nationalising the downside.

Barnaclebill, you are obviously unaware that MPs do typically start before 9 AM on Monday morning, by checking in at their constituency office before they travel to Westminster. Most MPs go by rail and they do travel on the same trains as everyone else, and get delayed as often as everyone else etc.

Then they work through until 10:30 at night. An average working week for an MP was found ten years ago to be over 70 hours, whether Parliament was sitting or not. It will have increased since then.

Northern Crock should have been allowed to go bust, full stop. As of now it is an albatross round our necks - and for what, exactly? £60bn of our cash being thrown around like confetti. Does the taxpayer benefit from this? If so exactly how?

Is Branson really a fit and proper person? His dealings to date don't bear much forensic scrutiny.

And how much of this largesse will find its way back to NuLab's coffers, eh?

I don't think this is nationalisation by another name (although I think I'm disagreeing with you on terminology, not facts), but "no effect on public spending, possible long-term benefit to the taxpayer" as anonymous suggests is extremely optimistic. This announcement leaves all the downside with taxpayers and all the upside with the private sector.

And Iain - when exactly was this "false market"? The stock exchange closed down on Friday afternoon as normal and didn't re-open until this morning, by which time the announcements had been made. It could certainly be argued that there has been a false market for the last few weeks, but I don't think such a charge can apply to the leaks and announcements over the weekend.

The Tories have not said that it was a bad idea to privatise the railways at all. The measures have worked and worked well. Indeed John Major's work has done more to revitalise the railway service, increase investment in the network and infra-structure and brought huge increase in passenger and freight traffic.

Maybe one day, as David Boothroyd will inevitably agree as he usually sees sense on these matters, John Major did more to save the railway network than any Prime Minister since World War Two. In Government hands great chunks of it got shut down and was vastly under-invested.

With regards to Northern Rock, a private sector solution to me seems to me the only option. We are where we are and it seems inevitable the Government will have to underwrite the sale in some way.

I agree with your point re "false/week-end markets" (that's why the announcement was made before trading could start, Iain)

However, there will be an upside benefit for the taxpayer, if I've read the announcement correctly, and if the new entity works.

Personally, my feelers will be out later this year looking for property bargains, as the lack of confidence will lead to re-valuations under-shooting reality (ie values will fall below trend and yields rise) as early as end of 2008.

It is generally agreed that one reason for the Government intervention in NR was to save the 6000 jobs, largely in the Newcastle area and a Labour fiefdom. This equates to £9m each but who cares as long as the staff continue to vote the right way.

The Chairman of the Northern Rock Audit and Risk Committee was the same person who wrote a report for government regarding the future funding of the NHS (Sir Derek Wanless). Surely the NR fiasco brings his competence into question.

If I remember rightly, although announcements that are price sensitive should be made to the LSE I believe there is a 'get-out' that allows a Monday a.m. announcement to be leaked to the Sunday press - ridiculous really but then I didn't make the rules

Speaking from the City - I believe Brown has left a huge uncertainty as to the process and level of support Government will provide to failing banks.

In the olde days the BofE would have dragged the UK Bank's chairmen into a room and locked the door until somebody agreed to salvage the Wreck. This was the old-boys way of doing things. It worked. Now there are no real UK banks left and the BofE has lost its powers due to political undermining.

The whole process is a complete mess. Gordon Brown has pulled both legs away from the BofE. This whole process of the Government propping up a cr*ap business model stinks of cronyism. Is probably illegal under the EU rules and sets an awful precedent.

I'm pretty sure from working on due diligences of public companies that under Stock Market rules that when a public company is facing a takeover then all the information made available to one bidder must be made available to all, information cannot just be made available to one preferred bidder.

This therefore begs the question of whether via HM Treasury, Darling or Brown made information available to Branson that was not available to JC Flowers or Lloyds TSB or any other bidder. Almost certainly yes is my guess, although it may be difficult to prove. I'm not an M&A lawyer so I don't know the punishment but its a pretty heavy one I suspect, and potentially criminal.

Taxcutter - NR is not a public company, and its books are opened by them to potential purchasers. There is a level playing field.

Just to clarify - a guarantee is not the same as a loan. If your parents eveer guaranteed a loan for you, you will be aware that that gave you financial clout, but it did not mean they had to put their hands in their pockets unless you got yourself into financial trouble.

The chances of NR actually costing the taxpayer real money are in my view slim - in fact if we do lose out then it will mean that there has been a catastrophic disaster in all sorts of other areas (massive increases in unemployment, iinterest rates and inflation) No-one is predicting that.

The pound is very strong against the dollar, and OK against the Euro, we have low unemployments, interest rates and inflation.

Calling me names won't alter the fact that the economic conditions are not completely unfavourable.

By the way, you say I was mendacious on three counts, and then provide one (ill-thought through) example. You clearly can't count after all!

The pound's strength against the dollar is obvious - even to people who cannot count. Relative weakness against the Euro is helping our manufacturers - and it certainly isn't in the meltdown that would have existed had we pursued the basket-case style econnomics of Ken Clarke.